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Real Estate

2013-01-02 13:38:32

Do I need pre-approval for my mortgage loan?

A-During the height of the real estate boom, getting a mortgage was as easy as picking out a new sofa for the living room. Now, home buyers have to jump through hoops before they can sign on the dotted line. The best first step in landing a home loan is obtaining a letter of prequalification. This means a mortgage lender has verified that you are approved for a mortgage of a certain amount over a fixed timeframe. Prequalification letters are prepared even before you’ve picked out your home. They remove some of the uncertainty in the home-buying process. In the current housing market, some real estate agents and sellers are reluctant to work with buyers unless they have one. With a letter in hand, buyers know exactly how much they can borrow and therefore how much house they can afford. A prequalification letter shows the seller and the seller’s agent that the buyer is capable of buying their house. For most sellers, the issue is not whether they can get an offer, but whether they can close the deal. Agents see preapproved buyers as more serious (and more valuable) because they’ve taken proactive steps to secure a prequalification. When it’s time to make an offer, a preapproved buyer will be in a better position to negotiate. Here’s what home buyers need to know about the new rules of mortgage prequalification. I got help on some of this information from Lisa Scherzer at www.smartmoney.com. Prepare your financial biography. Getting preapproved means a lender must review and verify a home buyer’s income, credit and assets to ensure he can make the necessary monthly payments on a house. In the wake of the housing bust, borrowers must be more forthcoming when it comes to their finances. Your lender should tell you precisely what you need, but be prepared to include: • W2 statements (or 1099 income statements) for the last two years • Federal tax returns for the last two years • Bank statements for the last few months • Recent pay stubs and proof of other income • Proof of investment income and assets Know you’re not obligated to one lender. Prequalification doesn’t bind you to a particular lender; it’s just a promise -- albeit, a conditional one -- that the lender is willing to make the loan. The buyer isn’t obligated to borrow from that lender. Prequalification will stipulate the loan amount or monthly payment but not necessarily the loan type or rate. When you apply, lenders use that day’s mortgage rates to estimate costs and payments. Just don’t expect them to keep the same rate they preapproved you with as the actual rate that will be available when you find a property and sign a purchase contract. Keep an eye on your credit score. Usually, a loan inquiry can ding your credit score. If you applied for a bunch of credit cards within a short period of time, for example, your FICO score might fall. (Most lenders use some version of the FICO score to determine your eligibility for credit and what interest rates and other terms they should extend to you.) But the credit-scoring models are designed to allow for mortgage loans. The score ignores mortgage, auto and student loan inquiries made during the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping, according to www.MyFico.com. Also, the score looks at your credit report for mortgage, auto and student loan inquiries more than 30 days old. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score. Deal only with a reputable lender. Sellers now are looking much more closely at who the buyer’s lender is. To avoid instances in which the lender might not be able to deliver on the loan, they want to see that any prospective buyer is working with a financially sound and reputable lender. To satisfy any doubts you might have about a particular lender, visit the Better Business Bureau’s web site to find out what kind of reputation they have. Watch the clock. Prequalification letters and the documents they verify have expiration dates. Those dates vary by lender, but the letters are typically valid for 90 days. If you’re still house hunting after, say, 60 days, and you’re concerned, ask your lender to re-validate the prequalification letter. Sellers want to be sure the buyer’s financial situation hasn’t changed since the time the lender initially checked them out. If any part of your financial picture has changed your credit, job status, income or assets, for example you should notify the lender so you’re prequalification can be adjusted. It will change your prequalification status if you take on new credit obligations for an auto, furniture, clothing or other possessions. It is best to hold off on any new monthly payment obligations that might lower what the lender can ascertain as your affordable monthly payment. These new commitments may lower what you are qualified to afford and could affect your prequalification status. These types of purchases should also be voided 90 to 120 days prior to application unless they are for emergencies like having an auto to drive to work or something of this nature. An exception is if your debt to income is extremely low.